Question

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:

		Total		Home Nursing		Meals On Wheels		House- keeping
Revenues	$	930,000	$	269,000	$	405,000	$	256,000
Variable expenses		454,000		111,000		192,000		151,000
Contribution margin		476,000		158,000		213,000		105,000
Fixed expenses:
Depreciation		69,600		8,900		40,400		20,300
Liability insurance		43,700		20,100		7,900		15,700
Program administrators’ salaries		114,700		40,700		38,400		35,600
General administrative overhead*		186,000		53,800		81,000		51,200
Total fixed expenses		414,000		123,500		167,700		122,800
Net operating income (loss)	$	62,000	$	34,500	$	45,300	$	(17,800)

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, considers last year’s net operating income of $62,000 to be unsatisfactory; therefore, she is considering the possibility of discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

1-b. Should the Housekeeping program be discontinued?

2-a. Prepare a properly formatted segmented income statement.

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?

Answer 1

1a
	Current Total	Total If house keeping is Dropped	Difference: Net Operating Income
Sales	930000	674000	-256000
Variable expenses	454000	303000	151000
Contribution margin	476000	371000	-105000
Fixed expenses:
Depreciation	69600	69600	0
Liability insurance	43700	28000	15700
Program administrators’ salaries	114700	79100	35600
General administrative overhead	186000	186000	0
Total fixed expenses	414000	362700	51300
Net operating income (loss)	62000	8300	-53700
Financial (disadvantage) $(53700)
1b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	930000	269000	405000	256000
Variable expenses	454000	111000	192000	151000
Contribution margin	476000	158000	213000	105000
Traceable fixed expenses:
Depreciation	69600	8900	40400	20300
Liability insurance	43700	20100	7900	15700
Program administrators’ salaries	114700	40700	38400	35600
Total traceable fixed expenses	228000	69700	86700	71600
Program segment margins	248000	88300	126300	33400
General administrative overhead	186000
Net operating income (loss)	62000
2b
Yes, a segmented income statement would be more useful